Tennyson Ltd is planning to develop an iron ore mine in northwest South Australia. Based on the quantity of inferred resources and current extraction rates the consulting geologist estimates that the mine will be depleted in eight years time. Management of Tennyson has been given the following estimates that relate to the provision of accommodation and services for the mine over its eight-year life.

They will purchase land for $380,000, demountable buildings for $220,000 and other equipment for $420,000. When the project ends (at the end of eight years) they expect to sell the land for $200,000, the buildings for $65,000 and the equipment for $95,000.

The project will also require an investment in inventory of $95,000 at the start of the project.

The annual cash sales are estimated to be $1,375,000 and cash operating costs are estimated to be $895,000.

Management wants to depreciate all assets over the mine life of eight years. The taxation office has provided advice that for tax purposes, buildings are depreciated over 20 years straight-line to zero and equipment at 15 years straight-line also to zero. Land cannot be depreciated for tax purposes and in this case there are no tax effects from gains and losses on land.

Will the project prove worthwhile for Tennyson Ltd given that the required rate of return is 25% pa and the company tax rate is 30%?